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CIRCULAR No.48/1998/TT-BTC OF APRIL 11, 1998 AMENDING AND SUPPLEMENTING CIRCULAR No.75A-TC/TCT OF AUGUST 31, 1993 OF THE MINISTRY OF FINANCE GUIDING THE IMPLEMENTATION OF DECREE No.57-CP OF AUGUST 28, 1993 OF THE GOVERNMENT DETAILING THE IMPLEMENTATION OF THE LAW ON PROFIT TAX AND THE LAW AMENDING AND SUPPLEMENTING A NUMBER OF ARTICLES OF THE LAW ON PROFIT TAX

Pursuant to the Law on Profit Tax adopted on June 30, 1990 by the VIIIth National Assembly; the Law on the Amending and Supplementing a Number of Articles of the Law on Profit Tax adopted on July 6, 1993 by the IXth National Assembly;

Pursuant to Decree No.57-CP of August 28, 1993 of the Government detailing the implementation of the Law on Profit Tax and the Law Amending and Supplementing to a Number of Articles of the Law on Profit Tax;

Pursuant to Decree No.59-CP of October 3, 1996 of the Government promulgating the Regulation on the financial management and cost accounting applicable to State enterprises;

Pursuant to Decree No.114/1997/ND-CP of December 16, 1997 of the Government amending Decree No.57-CP of August 28, 1993;

The Ministry of Finance hereby guides the supplements and amendments to Circular No.75A-TC/TCT of August 31, 1993 as follows:

1. To amend the said Circular's section on the tax calculation basis as follows:

Section II. 2- Regarding the turnover for calculation of taxable profit.

The turnover for calculation of taxable profit is the total goods sale money, processing remuneration, commissions, service charges (including surcharges and price subsidies (if any) enjoyed by the enterprise) and other revenues, not yet deducting any expenses of such business establishment incurred in the taxation period. For the assignment of package norms in the agricultural production, the turnover shall be money (including in form of products) earned from the work assigned in the form of package norm to employees in the enterprises engaged in agricultural and/or forestrial production.

For products and goods subject to the special consumption tax, the turnover for calculation of taxable profit is the sale turnover that has included special consumption tax.

For the advances paid for several years in the lease of houses and/or fixed assets, the turnover shall be the amount of rental collected in advance.

Section II.3.a- Fixed asset depreciation expenses

Enterprises shall have to register with their direct managing tax agencies their lists of fixed assets, the use duration thereof and the depreciation duration of each kind of fixed assets.

The purchase prices, use duration and method for depreciation of fixed assets shall comply with Decision No.1062-TC/QD/CSTC of November 14, 1996 of the Ministry of Finance on the regime of management, use and depreciation of fixed assets.

- For fixed assets of all capital sources which have been fully depreciated but are still in use, the depreciation thereof shall no longer be accounted into the production and/or business costs.

- Expenses spent by the enterprises to upgrade their fixed assets shall be reflected as the increase of purchase prices of such fixed assets, but not accounted into the business costs in the period.

- Expenses for repair of fixed assets, accounted or gradually charged into reasonable expenses shall be the actual amounts of reasonable expenses for fixed asset repair in the period:

+ Expenses for hired repair of fixed assets shall be calculated according to the amounts actually paid to the contracting repairers.

+ Expenses for self-repair of fixed assets shall be calculated according to reasonable expenses actually incurred.

For some special sectors where the expenses for repair of fixed assets vary from period to period or year to year, the enterprises that wish to deduct in advance the fixed asset repair expenses into their business costs shall have to work out plans therefor and submit them to the Ministry of Finance for consideration and decision; the enterprises shall have to notify the tax authorities directly managing them of the written decisions of the Ministry of Finance.

Enterprises shall have to make final settlement of actually incurred repair expenses against those deducted in advance; if the actual repair expenses are larger than those deducted in advance, the difference shall be accounted or gradually charged into the business expenses in the period; if the actual repair expenses are smaller than those deducted in advance, the difference shall be accounted into the business expense reduction in the period.

Enterprises of special sectors that apply the method of charging fixed asset repair expenses into the subsequent business periods, shall also have to work out their plans for charging fixed asset repair expenses and notify their direct managing tax agencies thereof.

Section II.3.c- Salary and wage expenses:

The salary and wage expense of an establishment shall be calculated on the basis of number of laborers of such establishment and the grade-based salaries and allowances (if any) thereof according to the current regulations as well as the production and/or business results of such establishment; more concretely:

- For State enterprises, Decree No.28-CP of March 28, 1997 of the Government on renewing the management of salaries and incomes in State enterprises, Circular No.13/LDTBXH-TT of April 10, 1997 of the Ministry of Labor, War Invalids and Social Affairs guiding the application of the method of setting wage unit prices and the management of wages and incomes in State enterprises, and other documents guiding the implementation of the said Decree shall apply.

- Non-State enterprises shall have to register their wage unit prices with their direct managing tax agencies as defined in Joint Circular No.20/LB-TT of June 2, 1993 of the Ministry of Labor, War Invalids and Social Affairs and the Ministry of Finance guiding the management of wages and bonuses in enterprises; specifically, the following documents are required:

+ The index of wage unit prices (according to the form prescribed in Joint Circular No.20/LB-TT of June 2, 1993 of the Ministry of Labor, War Invalids and Social Affairs and the Ministry of Finance) and the explanation of the specific calculation method).

+ The total number of laborers currently employed, including those who have entered into labor contracts; the report on wage fund, reward fund and other revenues of wage nature (according to the form prescribed in Joint Circular No.20/LB-TT of June 2, 1993).

In cases where an enterprise fails to register its wage unit price, the tax agency shall be entitled to determine the wage expenses according to Decree No.26-CP of May 23, 1993 of the Government to serve as basis for determining taxable profit.

- For non-State economic establishments (cooperatives, production groups, private enterprises, proprietorial households, joint stock companies), the salaries and wages of employees shall be accounted into the expenses according to the remuneration and product-based wage unit prices and the contracts between the employees and such enterprises.

To ensure the equality and rationality, the provincial/municipal Tax Departments can base themselves on the wage regime applicable to the State enterprises and the current prices to set the salary and wage norms for each branch and each occupation, then submit them to the provincial/municipal People's Committees for decision in each given period.

- The determination of salary and wage expenses to be deducted in calculating taxable profit must be based on the wage unit prices already registered with the tax agency(ies) so as to preclude the objective factors. The increase proportion between the actually paid salaries and registered salaries must not be higher than the increase proportion between the actual profit and registered one when setting the wage unit prices.

- The heads of business households shall be entitled to enjoy all incomes from the business activities after deducting all reasonable and proper expenses and paying all taxes as prescribed (including profit tax). For such reason, the salaries and wages for the heads of business households shall not be considered expenses when determining taxable profit.

2. To supplement the provisions on expenses in the said Circular's section on the tax calculation basis, as follows:

Section II.3.d:

- Reserve expenses

The State enterprises shall be entitled to deduct in advance their reserves into their expenses according to Circular No.64-TC/TCDN of September 15, 1997 of the Ministry of Finance guiding the setting up and use of the reserve for the price decrease of unsold goods, the reserve for bad debts and the reserve for the price decrease of securities of State enterprises. The non-State economic organizations shall not be entitled to deduct in advance such reserves into their expenses, but shall be entitled to account uncollectible debt amounts into their expenses in the following cases:

+ For debtors being legal persons:

. There are court decisions to settle bankruptcy of enterprises under the Law on Bankruptcy of Enterprises.

. There are decisions of competent agency(ies) on dissolution of enterprises as stipulated in Decree No.50-CP of June 28, 1996 of the Government on the establishment, re-organization, dissolution and bankruptcy of State enterprises and Circular No.25-TC/TCDN of May 15, 1997 of the Ministry of Finance guiding the above-said Decree.

. Other decisions of competent agency(ies) as prescribed by law.

+ For debtors being individuals:

. The debtors are still alive but there exist enough evidences proving that they have no individual property for debt payment;

. There are arrest warrants against debtors who have escaped or certifications by law enforcement agencies that they are serving their sentences.

. In cases where the debtors are dead and, therefore, incapable of paying debts; certifications thereon by local authorities are required.

- Expenses for educational, training, scientific research and health care activities under the prescribed regime.

3. To amend provisions on tax rates in the said Circular's section on the tax calculation basis as follows:

Section II.6.a- Profit tax rates:

The fixed profit tax rates prescribed in Clause 3, Article 1 of Decree No.114/1997/ND-CP of December 16, 1997 of the Government amending Decree No.57-CP of August 28, 1993 of the Government detailing the implementation of the Law on Profit Tax and the Law on the Amendments and Supplements to a Number of Articles of the Law on Profit Tax, shall be applied as follows:

Subjects liable to pay profit tax at the fixed tax rates on the whole year's taxable profit for each group of business lines and occupations shall include business establishments that can determine their taxable profits (except for small business households and households engaged in consignment trading). More concretely:

- The tax rate of 25% shall be applicable to the following sectors:

+ Electricity generation industry;

+ Mining, exploitation of minerals, forest products, aquatic products, water supply in service of production and daily life;

+ Metallurgy;

+ Machine building: machinery, equipment, transport means and conveyors;

+ Production of basic chemicals, fertilizers, insecticides;

+ Production of construction materials;

+ Construction activities, including survey and designing activities, construction supervision services;

+ Construction of infrastructure for lease in industrial parks, export processing zones and hi-tech parks;

+ Agricultural irrigation;

+ Transport, including loading-unloading activities at ports, garbage collection and transport;

+ Newspaper publishing: Particularly, newspaper advertisements shall be separately accounted and subject to profit tax at the rate of 45% on the profit earned from advertising activities. Any loss incurred by the newspaper publishing activities shall be offset with the taxable profit from newspaper advertisement activities and the remaining taxable profit amount shall be taxed at the rate of 45%;

+ Educational and vocational training activities;

+ Agricultural products turned out and directly processed by farms, central logging and forestation camps and production stations, such as: sugar cane grown and processed into molasses; cotton grown and processed into seed cotton; coffee grown, hulled, roasted and ground into powder; preliminary processing of liquid rubber latex into dry latex of various kinds;

+ Interests on treasury bonds and bills;

- The tax rate of 35% shall be applicable to consumer goods production industry, foodstuff industry, food processing and other production branches;

- The tax rate of 45% shall be applicable to trade service, food catering and services of various kinds;

Repairing activities of industrial character, such as: repair of transport means, machinery and equipment, shall be rated as the corresponding industries on the basis of the characteristics of such activities.

For example: Repair of ships and automobiles shall be rated to the tax rate of 25%, applicable to the manufacture of transport means.

The repairing activities in service of daily life, such as repair of civil electric appliances, electronic appliances, bicycles and motorbikes shall be subject to the tax rate of 45% applicable to other services.

Other profits shall be subject to profit tax at the rate applicable to basic business activities. In cases where the basic business activities are subject to different tax rates, other profits shall be taxed at the rate applicable to the business line with the largest proportion of the gross taxable profit.

An establishment engaged in various business branches and/or trades, subject to different tax rates shall have to separately account its taxable profit earned from each branch or trade and pay profit tax at the tax rate applicable to such branch or trade. In cases where it is unable to separately account its taxable profit earned from each branch or trade, the highest profit tax rate for its business branches or trades shall be applied to its gross taxable profit.

Section II.6.b- Profit surtax rates:

Pursuant to Article 6 of Decree No.57-CP of August 28, 1993 of the Government and provisions of Clause 4, Article 1 of Decree No.114/1997/ND-CP of December 16, 1997 of the Government, if a business establishment has its taxable profit exceeding the prescribed level, it shall, besides paying the profit tax at the fixed tax rates as mentioned above, have to pay the profit as follows:

- A State enterprise that has a high taxable profit shall have to pay the profit surtax. The profit surtax shall be calculated on the profit amount remaining after the payment of profit tax at the fixed tax rate applicable to its business branch or trade and the deduction for setting up three funds of the enterprise (production and business promotion fund, welfare fund and reward fund).

+ The applicable profit surtax rates:

* The tax rate of 30% shall be applicable to such sectors as: natural resource exploitation, production, construction and transport.

* The tax rate of 40% shall be applicable to trade service, food catering and services of various kinds.

+ Every business establishment shall pay the profit surtax at only one tax rate. In cases where a business establishment is engaged in several business branches and/or trades, the applicable profit surtax rate shall be the one applicable to the branch or trade with the highest taxable profit.

+ The basis for determining the profit surtax:

Profit subject

Profit surtax = to profit x Surtax rate

surtax

Profit Taxable Payable Three

subject = profit - profit tax at - funds of

to surtax the fixed rate enterprise

* The levels of deduction for setting up the three funds of an enterprise to serve as basis for determining the profit subject to profit surtax are stipulated as follows:

The production and business promotion fund shall represent 50% of the taxable profit amount remaining after deducting the payable profit tax amount calculated according to the fixed rates.

The welfare fund and reward fund: shall be equal to three months' wages paid by the enterprise on the basis of the wage regime prescribed by the Government in Decree No.28-CP of March 28, 1997 on renewing the management of salaries and incomes in State enterprises and its guiding documents.

+ In cases where the business establishments are entitled to set up specialized funds: the statutory capital supplement fund, the financial reserve fund,... the deductions therefor shall come from the profit remaining after the payment of profit tax and profit surtax.

+ The profit to be distributed as dividends shall be deducted from the profit amount remaining after the payment of profit tax at the fixed tax rate and profit surtax.

For example: Enterprise X has the following taxable profit amount:

Taxable Fixed Profit

profit tax rates tax

(mil VND) (%) (mil VND)

Supply and

services 2,500 45 1,125

Transport 50 25 12.5

Other production activities 80 35 28

Other profits 120 45 54

Total 2,750 1,219.5

+ The total actual reasonable wage fund for the whole year as prescribed: 864 million.

+ Profit tax at the fixed tax rate: 1,219.5 million

+ The funds of the enterprise

864 mil x 3

{(2,750 mil - 1,219.5 mil) x 50%} + ---- ------------ = 981.2 mil.

12

+ The payable profit surtax (at the tax rates applicable to trade and service activities):

(2,750 mil - 1,219.5 mil - 981.2 mil) x 40% = 219.7 mil

+ The total payable profit tax amount:

1,219.5 mil + 219.7 mil = 1,439.2 mil

- Non-State economic organizations, such as joint stock companies, limited liability companies and economic collectives having mobilized capital from individuals, business organizations, as well as representatives of contributed capital of organizations or collectives and State enterprises, and earning a monthly average taxable profit per capital contributor of more than 10 million VND, shall pay the profit surtax according to the following stipulations:

The profit surtax shall be determined on the basis of the profit subject to the surtax and the tax rate. The profit subject to the surtax is the profit remaining after the payment of profit tax at the fixed tax rate, minus (-) the investment fund which represents 50% of the profit amount left after the payment of the profit tax. The profit surtax rate is 25%.

For example: Joint stock commercial bank A has 15 stockholders, including 10 individuals and 5 representatives of organizations or State enterprises, and its taxable profit in 1997 was 2,000 million VND; the profit tax and surtax shall be calculated as follows:

1) Profit tax at the fixed tax rate:

2,000 mil VND x 45% = 900 mil VND

2) Profit surtax:

The monthly average taxable profit per capital contributor is over 11 million VND (2,000 mil VND : 15 stockholders x 12 months). So, the payable profit surtax shall be as follows:

+ The profit amount remaining after the payment of profit tax:

2,000 mil VND - 900 mil VND = 1,100 mil VND

+ Investment fund to be deducted when calculating payable profit surtax:

1,100 mil VND x 50% = 550 mil VND

+ Payable profit surtax:

(1,100 mil VND - 550 mil VND) x 25% = 137.5 mil VND

+ The total payable tax amount:

900 mil VND + 137.5 mil VND = 1,037.5 mil VND

The above-said payable profit tax calculation method shall apply only to the calculation of profit surtax to be paid by non-State economic organizations.

- If a private company or business household has a monthly average taxable profit of over 10 million VND, it shall have to pay the profit surtax on the taxable profit amount in excess of 10 million VND at the tax rate of 25%.

4. To add to the end of Point 4, Section IV of the said Circular on tax declaration, payment and collection the following:

- Profit tax payment declaration by independent cost-accounting units: For independent cost-accounting units having branches or attached units that have paid profit tax thereat, when the final settlement of tax is made, such profit tax shall be incorporated into the business results of such independent cost-accounting units. In cases where a branch or an attached unit suffers from loss, the loss caused by objective reasons shall be determined and offset against the taxable income of the head office; the remaining loss amount shall be transferred to the following year as stipulated by the Law on Profit Tax.

- An enterprise that undertakes self-reliant capital construction activities for the internal repair or construction purpose, including planting and tending of perennial tree gardens shall, during the capital construction period, be entitled to annually deduct a prescribed amount or percentage (%) from the value of such capital construction volume as profit for setting up reward and/or welfare funds. All revenues determined as profits shall be subject to profit tax before being distributed to employees.

- An enterprise that is engaged in property leasing activities, such as: lease of houses and/or offices or dealing in infrastructure with rental collected in advance for years, shall have to conduct separate cost-accounting and its taxable profit shall be calculated as follows:

Taxable Total Payable

profit advance turnover Related

from = rental - tax on - expenses

advance turnover advance

rental rental

turnover turnover

The expenses related to the generation of taxable turnover shall be determined as follows:

* The expenses for construction of infrastructure or expenses for construction of residential houses and/or offices, with regard to enterprises leasing houses, offices or dealing in infrastructure:

+ For dealing in infrastructure or leasing houses and offices, they are the expenses for construction of infrastructure or those for construction of residential houses and offices directly related to the leased area with lump-sum rental. For cases where the rental is collected beforehand and the lease term is shorter than the minimum use duration in the fixed asset use duration bracket (Appendix 1 issued together with Decision No.1062-TC/QD/CSTC of November 14, 1996 of the Minister of Finance), the construction costs shall be charged upon the actual lease term. Enterprises may register the use duration of fixed assets in accordance with Decision No.1062-TC/QD/CSTC of November 14, 1996.

For example:

Enterprise A has the function of leasing offices, in 1996 it leased to enterprise B 1,000 m2 of offices for 10 years and with a rental of 1,000,000 USD, to enterprise C 1,000 m2 for 30 years and with a rental of 3,000,000 USD and to enterprise D 1,000 m2 for 30 years and with a rental of 3,000,000 USD. Assuming that the construction cost of one m2 of leased office is 1,250 USD, and the minimum use duration of the firmly-built houses as specified in Appendix 1 issued together with Decision No.1062-TC/QD-CSTC is 25 years, the construction costs shall be charged in each case as follows (if enterprise A registers a house depreciation duration of 25 years):

+ For turnover generated from the lease of offices to enterprise B, the construction costs to be charged for determining taxable profit in 1996 shall be calculated as follows:

1,250USD/m2 x 1,000m2

Construction costs = ---------- x 10 years

25 years

= 500,000 USD

+ For turnover generated from the lease of offices to enterprises C and D, the construction costs to be charged for determining taxable profit shall be calculated as follows:

Construction costs = (1,250 USD/m2 x 1,000 m2) x 2 = 2,500,000 USD

In cases where the actual construction costs for construction project units in a taxation year cannot be determined, such costs shall be temporarily determined on the basis of cost estimate according to the techno-economic explanation and charged to the leased area with lump-sum rental. The final settlement upon the completion of the project, the actual construction costs shall be re-determined, the difference between the actual costs and estimated ones shall be integrated into the business results of the fiscal year following the year of completion of the project.

* Other expenses arising in the year shall be charged into the advance rental turnover, concretely:

Expenses Total of other

arising expenses arising The

in the year in the taxation year advance

to be charged = -------- x rental

into the advance Total turnover turnover

rental turnover generated in

the year

- In cases where an enterprise doing business with the infrastructure or leasing houses and/or offices is in the period of enjoying tax preference, the taxable profit from the advance rental turnover shall be determined as follows:

Taxable Taxable profit

profit from the advance Number

from the rental turnover (of years Number

advance = ------- x with - (of years

rental Number of years advance with tax)

turnover with advance rental) exemption

rental

In which:

Number of Number of years Number of years

years = with tax exemption - counted from

with tax according to the the year the

exemption to the investment enterprise

license makes profit

Every two years of tax reduction shall be tantamount to one year of tax exemption

5. This Circular takes effect 15 days after its signing and applies to the final settlement of profit tax from 1997. The previous stipulations which are contrary to this Circular are now annulled.

For the Minister of Finance

Vice Minister

VU MONG GIAO